3D Systems, Stratasys Started at Buy at FBR; Expensive, But Worth It

By Tiernan Ray

FBR Capital‘s Ajay Kejriwal this afternoon initiates coverage of 3-D printing names 3D Systems (DDD) and Stratasys (SSYS), with price targets of $85 and $155, respectively, writing that the 3-D industry will see “increased penetration and adoption rates not only for prototyping applications but also for production parts in healthcare and consumer markets.”

Shares of 3D Systems today closed up $1.73, or 2%, at $76.89, while Stratasys shares are up $1.07, or 0.9%, at $118.84.

The 3-D stocks are richly valued, but Kejriwal thinks valuations can remain elevated for some-time given the growth prospects of the companies.

After looking at richly-priced shares in other industries, such as Internet stocks, he finds that such valuations do persist for a time, and when multiples compress, it’s not always a disaster:

High valuations (defined as price/sales ratio of 10x-plus) are not uncommon for very highgrowth companies and especially for companies with potentially disruptive technologies/business models. High valuations can proceed to get higher, especially in the early growth stages. It appears that when investors perceive a technology or business model to be disruptive, there is willingness to look much further out into the future. High valuations can be sustained for fairly long periods of time and in several cases for many years, especially when growth surprises on the upside. Ultimately, valuations for these companies decline from high levels as growth slows. However, compression in valuation does not necessarily result in subpar stock returns where returns are more dictated by reset growth expectations and how these stack versus other sectors/alternative opportunities [...] The Internet giant Google (GOOG) enjoyed a P/sales ratio averaging 14.6x over the 2004–2007 period when the company was in a very high-growth phase. Valuation declined as growth slowed from the very high rates but still remained relatively high with an average P/sales ratio of 5.6x over 2010–2012. We saw similar trends with eBay, Amazon.com, and Yahoo!—all enjoying very high P/sales ratios over multiple years, reflecting high growth rates and high investor expectations. These ratios, of course, declined as growth slowed down.

As for the businesses, 3D Systems may benefit from its nascent position in metal shaping, and from the expansion of its “consumables/supplies” business, as well as by adding to its wide array of tecnologies, he thinks:

3D Systems employs seven different technologies. This diverse offering includes SLA, SLS, SLM, FTI, PJP, MJP, and CJP. Having several technologies allows for more exposure in certain industries, as well as more diversified applications. In industries such as aerospace and automotive, these technologies can reduce the time it takes to design drafts and create more efficient parts because of lighter weight. We expect the company to add to its already large array of technologies, and the recent announcement of development of an integrated platform using additive and subtractive technologies is illustrative of potential future additions. Improving mix in favor of higher-margin materials and in Quickparts to drive margins. 3D Systems continues to execute its razor and blades business model. Its materials segment is the highest-margin business at nearly 75%, while its printers and services segments delivered margins in the mid 40s. As the installed base of printers increases, along with better usage, the proportion of recurring revenues could increase to 75%-plus, driving significant upside to margins. We also expect Quickparts’ margins to increase as the company works through lower margin backlog and prices new orders at better margins.

As for Stratasys, among the varioius positive factors, he likes the company’s entry into the “prosumer” 3-D printing market with the acquisition of Makerbot earlier this year, and he likes its high investment rate in R&D:

The MakerBot acquisition extended Stratasys’ reach into the consumer/professional segment. MakerBot has developed the largest installed base of 3D printers in the category by making high-quality 3D printers at reasonable prices. While MakerBot did not provide any new technology content, it is important for distribution channels, brand recognition, and consumer-grade systems growth. We expect MakerBot to continue to drive 30%–50% growth rates over the next several quarters [...] Stratasys continues to look for new ways to develop its technology portfolio through both in-house R&D efforts and through acquisitions. We note that Stratasys’ R&D budget, at $55 million to $60 million for 2014E, is the highest in the industry. We expect acquisitions of complementary and newer technologies to add to the company’s existing portfolio. Additionally, we would not be surprised to see the company introduce products based on SLA/derivative technologies and SLS-based products as key competitor patents expire in the next couple of years. There is an ongoing effort to develop newer materials, including fiber reinforced FDM, to help drive newer applications and usage.

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There are 4 comments

DECEMBER 2, 2013 6:51 P.M.

michael dell wrote:

you are setting people up for a fall again , shame on you

DECEMBER 2, 2013 8:00 P.M.

Panamakid wrote:

Remember me, DDD and SYSS. When U were in the toilet, I held on. And yes, U are expensive, but RU worth it? I like to talk to my stocks like this. Pleeeeeeeze go up or U know what is going to happen, don't U? I'll be watching U guys, don't disappoint or UR next 3D project is designing crosses.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.